ELITE PRECISION MACHINERY CO. LTD. v. VINCENT PRECISION MACHINERY CO. LTD.

1994, No.A6759

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. Plaintiff in this matter claims repayment from Defendant of the sum of $256,320 paid to Defendant in terms of a contract for the purchase of two plastic injection moulding machines. It is Plaintiff's case that Defendant refused to effect delivery of the machines and thereby repudiated the contract, that repudiation being accepted by it. Defendant denies that there was ever any repudiation and tenders delivery of the two machines.

The history of the matter

2. The Plaintiff company has for some time carried on business in Hong Kong as a manufacturer of and trader in plastic injection moulding machinery. At one time it employed a gentleman named Lee Yat Hong. There was, however, a parting of ways. From the evidence, I am satisfied it was not amicable. Lee then set up his own company to carry on business of a similar nature. The company which he formed is the Defendant company in this matter and at all material times Lee has been its managing director.

3. In late 1993, Plaintiff's managing director, Ng Ming To, became suspicious that Defendant company may be manufacturing machinery which was a direct copy of his own company's machines. Whether, in fact, it was doing so is irrelevant to these proceedings but that suspicion explains the motivation for Plaintiff's subsequent actions.

4. Plaintiff wished to acquire a couple of the machines to verify its suspicions but did not wish overtly to be seen to be doing so. It therefore engaged a private investigation agency named Fact Finders Ltd. ("Fact Finders") and gave to it the mandate to acquire the machines on its behalf. This was subject to the condition that Plaintiff would at all times remain an undisclosed principal.

5. In furtherance of the mandate, two employees of Fact Finders entered into negotiations with Lee acting on behalf of Defendant company to acquire machines. The first of those employees was named Lam Yuen Chak who held out that he represented an organization called Metro Trading Company. The second employee, a European, gave himself the name Bergman and held out that he was representing a South African company called Protea Trading Pty. Ltd.

6. Negotiations were successful: machines were identified and a price of $256,320 'ex factory' was agreed. There was a discussion as to which trading entity should be named as purchaser and Lam stated that it should be a company called Advance Co. Ltd. ("Advance"). There was in fact no company registered in Hong Kong under that name; it was purely a name of convenience used by Lam to ensure that Lee would not come to know that either Fact Finders or the Plaintiff were involved in the purchase. Lam advised that the address for Advance should be the same as Metro Trading Company.

7. A written agreement dated 28th December 1993 was entered into. In terms of that agreement the purchaser was to pay a 10% deposit on signing the contract and the balance 3 days before delivery of the machines. The deposit was duly paid.

8. A week or so later, on 4th January 1994, Lee advised Lam that the two machines were ready and the following day, that is, 5th January, the man known as Bergman personally handed to Lee a further cashier's order for the balance of the purchase price.

9. In order to make final arrangements for delivery, Lam then attempted to contact and speak with Lee. He was unable to do so. Nor was he able to make any arrangements concerning delivery with any of Lee's associates or employees. In fact, Lam was unable to contact Lee until 26th January, nearly three weeks later, when he had a face-to-face meeting with him.

10. Lee did not deny that he had actively avoided Lam during that period of time, declining to return calls. Nor did he deny that during that time, if he could manage it, he had no intention of making delivery of the machines. His stated reasons for this course of action were sometimes confused but, having heard the evidence, I am satisfied that, having received two cashier's orders instead of ordinary business cheques and noting that they were drawn on the Chekiang First Bank in Kwun Tong, the Plaintiff's own bank and branch, Lee became suspicious that either Plaintiff was somehow behind the purchase or, if it was not the Plaintiff, that some other unknown organization wished to obtain his machines for the purpose of copying them. He, therefore, resolved not to release the machines until he had been able to discover the true identity of the party acquiring the machines.

11. Lee did not, however, communicate his concern to Lam or Bergman, the two men with whom he had been dealing. Instead, searches of the Companies Registry took place and from this it was discovered that there was no company registered in Hong Kong carrying the name of the purchaser, Advance Trading Co. Ltd. This, I am satisfied, further fueled his suspicions. On 26th January, still wanting to know the true identity of the purchaser but not wishing to divulge his suspicions, Lee for the first time sent a written communication to Lam. This was sent to Lam at his Metro Trading fax number and read in part as follows -

"2. According to the CPA and solicitor advice, please inform us the parent company of the Advance Trading Co. Ltd. and the directors list and whom can be authorized to sign. Otherwise we will [be] in the taxation and other trouble.

3. We want to know that the final destination of the [goods] is because we don't want to have any argument in the future for the after-sales service support. We can provide all service in PRC and the world.

Please understand that we don't want to involve in your business transaction but we want to reduce the arguments later. Awaiting your information."

12. On 28th January a reply was sent by fax under Metro Trading letterhead. This letter, signed by Tsang Yau Choo, a director of Fact Finders, refused to give the required information, describing the request as 'unreasonable', and demanded that delivery of the two machines be made within five days failing which legal action would be taken.

13. Lee's response to this faxed demand was, frankly, highly unusual. Instead of communicating direct with Lam who had acted as negotiating agent from the beginning or Tsang who had written the faxed demand holding himself out to be an authorized representative of Metro Trading, Lee chose instead to place an advertisement in a Chinese language newspaper, the Ta Kung Pao. The advertisement was published on the morning of 3rd February 1994. A certified translation of the advertisement was never placed into evidence. The original, however, was translated by the court interpreter. The advertisement requested the representatives of Advance to collect the machines upon production of letters of authority.

14. After publication, a copy of the advertisement was sent to Advance by registered post at the address given on the contract which was Metro's address but, because the name Metro Trading did not appear on the envelope, it was returned to sender endorsed: "No such company".

15. When Tsang, purporting to act for Metro and Advance, received no response to his faxed demand, a further letter was personally delivered to Lee on 2nd February. Strangely, although the Ta Kung Pao advertisement was to appear the following morning, there is no suggestion that, when he received personal delivery of this letter, Lee said anything of the impending publication.

16. The letter delivered to Lee on 2nd February was again on Metro Trading letterhead and signed by Tsang. It read as follows -

"Your failure to deliver to me the 'V-5' and 'V-14' plastic injection moulding machines (the machines) according to the contract dated December 28, 1993, despite my repeated demands no doubt amounts to a wrongful repudiation of the said contract. Upon further consideration of the matter, I write to accept your repudiation of the said contract for the sale of the machines and demand your immediate refund of the full amount of the purchase price..."

17. It is Plaintiff's case that, upon delivery of this letter, the contract between the parties was at an end. It had accepted Defendant's repudiation and that acceptance could not be withdrawn.

18. It is Defendant's case, however, that it had done nothing to breach the contract and that there was, therefore, no ground upon which Plaintiff could treat itself as discharged.

The Plaintiff's case

19. It is not disputed that the Plaintiff, in instructing Fact Finders to purchase the machinery on its behalf but not to disclose its interest, nevertheless retained the right in law to sue on the contract entered into by its agents.

"An undisclosed principal may sue or be sued on any contract made on his behalf, or in respect of money paid or received on his behalf, by his agent acting within the scope of his actual authority." (Bowstead and Reynolds on Agency, Sixteenth Edition 408.)

20. It is Plaintiff's case that Defendant committed a repudiatory breach of the contract of sale by actively frustrating Plaintiff's agents from taking delivery of the machinery from 6th to 26th January 1994 even though delivery should have been tendered at the latest within three days of payment of the purchase price and thereafter by ignoring a written demand to tender delivery.

21. As for the refusal to supply the information sought by Defendant in its faxed communication of 26th January, it is Plaintiff's case that the supply of such information was never a term of the contract and in no way was it required to give effect to the contract.

22. A repudiatory breach of contract must be one that goes to the root of the contract; as it is sometimes termed, it must be a fundamental breach.

23. Unless Defendant can show on the probabilities that it had good cause for frustrating delivery and good cause for demanding the information contained in the fax of 26th January 1994, in my judgment its failure to tender delivery timeously and thereafter its attempt to impose further terms by demanding further information amounted to such a fundamental breach. At the time Plaintiff accepted Defendant's repudiation, it had no idea when, if ever, it could expect delivery of the machinery to it.

24. I am satisfied that Plaintiff, being entitled to accept repudiation, did do so in clear terms in its letter of 2nd February 1994.

25. The question at the heart of the matter, therefore, is whether Defendant had good cause for the actions it took.

The Defendant's case

26. I have stated already that I am satisfied that from 5th January Lee was concerned about one matter only, that is, to learn the true identity of the buyer to either dispel or confirm his suspicions concerning the purpose for which the machines were being purchased. This concern, however, was not one put to the agents acting for the purchaser even though, according to Lee, it was a concern upper most in his mind at the material time and arguably should have been put.

27. Put bluntly, at the material time, Lee, on behalf of Defendant, appears to have wanted to have matters both ways; he wanted to retain the purchase price paid to him but wanted also to hold back delivery of the goods until, by means of investigation and interrogation, he had confirmed or dispelled his privately held suspicions.

28. But were Lee's suspicions in themselves good cause for frustrating delivery? I do not think they were.

29. In evidence, Lee stated that he had no concerns that Plaintiff might be the true purchaser. It was the thrust of his evidence that Plaintiff would have no right of action against Defendant company based on similarity or even sameness of design. As for the fear that the true purchaser might intend to use the machines as models in order to manufacture cheaper versions, Lee's suspicions had only the frailest of foundations and were seemingly later dispelled or put to one side when Defendant tendered delivery.

30. What then of the alternative grounds argued by Defendant?

31. In respect of the demand to know the destination of the machines so that customs and taxation problems could be avoided or, as it was put in Defendant's demand, so that there would be no later dispute over after sales service, in paragraph 8 of his witness statement Lee made it clear that on 5th January 1994, before his suspicions as to the true purpose for which the machines were being purchased, he had no such concerns. Paragraph 8 reads as follows -

"On the 5th January, when the machines were fully packed and ready for collection at any time, I signed the delivery note and faxed it to the Dongguan factory. There was absolutely nothing else left for me to do in this transaction. Anyone in Vincent [Defendant company] could be contacted for collection of the machines provided full payment was tendered."

32. During the course of his testimony, Lee further accepted that Defendant company employed clerks who, in the ordinary course of their employment, filled out delivery papers and customs clearance documents for purchasers and accompanied them if necessary to the customs authorities. In short, the fact that the goods were to be exported was simply one of the mundane matters to be filled out by a clerk.

33. In any event, it was never disputed that delivery 'ex factory' meant that the Defendant had a responsibility only to hand over the machinery to the purchaser at the Dongguan factory and that it was thereafter the purchaser's responsibility - not that of Defendant company - to arrange transportation and customs clearance.

34. What then of the contention that Defendant was entitled to be assured that whoever collected the goods was an authorized representative so that no risk was run that they would be delivered to the wrong party? In principle, of course, this may be correct. But in the circumstances of this case I am satisfied that Lee had no such fear.

35. Lee had from the beginning dealt with Lam who he knew was at all times an agent for Metro Trading. It had been Lam who had, in fact, directed him to use the name Advance as the purchaser, using Metro's address, and he had been content to follow Lam's instructions in this regard. The contract duly chopped had been collected at Metro's office together with payment of the deposit. It had been Lam who had attempted to contact him on several occasions concerning delivery and who Lee admitted he had diligently avoided concerning that very matter; namely, delivery. There could have been no doubt in Lee's mind, whatever the status of Advance, whether it was a company in the process of registration or simply a name of convenience, that Lam was the authorized agent of the purchaser.

36. It is also telling, in my judgment, that Lee's faxed letter of 26th January 1994 to Metro Trading which was for the attention of Lam himself did not directly deal with the specific issue of receiving an assurance that whoever received delivery of the goods would be duly authorized but was couched in far broader terms, couched, in my judgment, rather as a demand for information which would divulge the true nature of the purchaser. This was information, I am satisfied, which Defendant was not entitled to obtain in order to fulfill its obligations under the contract.

Whether there was repudiation

37. I am therefore satisfied that Defendant had no good cause for its failure to tender delivery timeously, that such failure was a fundamental breach of the agreement and that Plaintiff was entitled to and did accept the repudiation.

38. Having accepted repudiation, Plaintiff was entitled to a refund of the moneys it had paid under the contract.

Events after repudiation

39. On 9th February 1994, one week after repudiation, Plaintiff's agents sent a letter to Defendant attempting to find a way out of the impasse. That letter went some way towards meeting Defendant's demand for information, stating, for example, that Placid Ltd. was the parent company of both Metro and Advance. The letter was not drafted, however, on the presumption that the contract of sale was still in existence. Inter alia, it read as follows -

"It is for this reason that any payments made by you in respect of this matter should be made payable to Placid Ltd.

You may take this letter as authority for Mr. Y. C. Lam to negotiate on Placid's behalf regarding this matter and the machines may be delivered to the person bearing a letter with my signature in acceptance of the delivery."

40. This letter did note that Defendant was to transport the machinery to Hong Kong and stated that address for delivery would be given to Defendant shortly. Defendant has complained that no such address was given.

41. Whether that was so or not does not alter the fact that the original contract was terminated. Once Plaintiff had accepted the repudiation, the acceptance could not be withdrawn either directly or impliedly. Although there may then have been attempts to reach a settlement agreement, there is no evidence before me that subsequently any new contract was entered into.

Orders

42. There will therefore be judgment in favour of the Plaintiff for the following -

1. The sum of $256,320 together with interest thereon at judgment rate calculated from the date of issue of the writ;

2. Costs.